The pace of recovery in the major advanced economies has improved this year and growth in China appears to have passed a trough, but growth prospects now look weaker in several major emerging economies. A sustainable recovery is not yet firmly established and important risks remain.

Stimulus alone is not enough

More than five years into the crisis, it is clearer than ever that reaching a strong sustainable recovery will be marathon, not a sprint.

More importantly - recovery cannot be sustained by stimulus alone, as recent events and financial market turbulence over the summer underline.

Potential output growth is expected to be lower between now and 2020 in both advanced and emerging economies. This reflects structural changes such as demographics, the legacy of the crisis itself and complacency in making policy reforms.

Growth may be too low to create the jobs needed to reduce significantly the often high levels of unemployment and under-employment built during the crisis and address long-standing social inequality.

We cannot just treat the symptoms - there is no way to avoid the hard work of tackling the underlying causes of slow trend growth and lacklustre job creation.

I welcome G-20 leaders’ commitment at St Petersburg to develop comprehensive growth strategies. It is vital to join up the pieces of the puzzle – to link stimulus measures with structural reforms to business regulation, taxation, innovation policies, labour markets and finance.

These structural reforms can boost growth and help job creation, while helping to improve debt sustainability, the public finances and tackling social pressures.

At the same time, G-20 comprehensive growth strategies should be used to join up policies across countries to make sure the whole adds up to more than the sum of the parts.

Structural reforms have an important role of play in helping to reduce excessive global imbalances and reducing spillovers between countries. For example, vulnerability to shifts in international capital flows is lower if national policy frameworks are attractive to long-term investors who will stay the course. By contrast, economies where long-term investments face less favourable conditions are prone to property boom-busts and unsustainable short-term capital inflows that lead to costly reversals.

The G-20 is making progress on structural reforms

Let me update you on progress on one part of the picture – structural reforms.

G-20 countries are making progress. Looking back since the Los Cabos Action Plan, 23% of structural reform commitments have been fully implemented and progress is underway in most other areas.

The St Petersburg Action Plan includes 128 structural reform commitments. About half of these commitments are new, while others are restated from earlier plans.

An OECD-World Bank assessment confirms that the St Petersburg Action Plan structural reform commitments were more streamlined than in earlier plans. Progress in implementing commitments will be easier to assess than before as more commitments are clear and observable policy intentions.

But, there remains considerable room for future improvement in the assessability of structural reform commitments – in short, your ability to hold each other to account.

Also, a significant proportion of the “new” commitments relate to actions that were already underway. There is scope to be more ambitious !

Banking reform needs to go one step further

A stronger recovery needs higher and better targeted investment. While huge progress has been made since the crisis on repairing the financial system and making it more stable, reform of the financial system is still work in progress.Too much capital continues to flow to the wrong activities or places, or not to flow at all.

Reform of the banking system is incomplete. This holds back long-term investment financing. It also creates risks to the recovery from increasingly concentrated highly-leveraged too big-to-fail institutions.

Structural banking reforms should be a cornerstone of achieving strong, sustainable and balanced growth. The OECD will work with the FSB and IMF in assessing these issues, as Leaders mandated in St Petersburg.

Regulatory reforms need to go further in curbing the incentives for banks to engage excessively in financial engineering activities, while encouraging them to focus on financing productive investments. These efforts should include making sure that regulations are not biased against the financing of long-term investment.

Well-capitalised banks can support long-term investment. In this regard, the situation in the United States and Europe is remarkably different; European banks are not well capitalized. Moreover, they hold derivative positions that are as high as they were before the crisis. Hence, a sharp rise in volatility could imply another bout of severe stress for European banks arising from significant exposure to risky trading positions, with adverse effects on these banks’ capacity to lend to the real economy. Thus, regulatory reforms should include the separation of risky and distracting derivatives activities from traditional banking activities and the setting of simple and binding regulatory leverage ratios for banks’ overall balance sheets.

Looking ahead

The world economy will in the coming years need to learn to live without stimulus. We need to do everything possible now to ensure that the economy will be in good shape. The OECD stands ready to work over the coming year to ensure a comprehensive approach to achieving strong, sustainable and balanced growth.